Hospitality sector, realtors say Chafee tax hikes would hurt RI

As happened last year when he proposed an extensive expansion of the sales tax, industry groups are voicing opposition to Governor Chafee’s newest list of proposed tax increases.

Those in the hospitality and real estate fields are nervous that tax increases will do much more harm than good.

Dale Venturini, president and CEO of the Rhode Island Hospitality Association (RIHA), wrote an open letter regarding the proposed 2-percent tax increase on meals and beverages. Chafee hoped the higher 10-percent tax will generate $39.5 million to help close the $215 million deficit, but Venturini thinks otherwise.

“Governor Chafee’s budget proposal is a shortsighted attempt to generate additional revenue for the state,” she wrote. “The proposal will ultimately end up costing more than it is worth as it will persuade tourists, conventions, and even residents to conduct their business elsewhere while simultaneously failing to address the root causes of Rhode Island’s perennial budget deficit.”

Last year, Chafee proposed extending the sales tax to a broad spectrum of services and goods to raise an added $168 million in revenues. As part of the package, which failed to gain legislative approval, Chafee proposed dropping the rate from 7 to 6 percent. This year, Chafee has a far shorter list of increases with no corresponding decline in the base rate.

Mike Stenhouse, CEO of the Rhode Island Center for Freedom and Prosperity (RICFP), said his organization used a tool called RI-STAMP (State Tax Analysis Modeling Program) to project how Chafee’s tax plans would affect Rhode Island.

RICFP based their STAMP algorithm on Chafee’s proposed budget, factoring in data from the past. They entered a $69.7 million increase in sales tax, a $13.6 million increase on motor vehicle registration and a $7 million increase in taxed smoking items. The results they found were mostly negative.

The highlights of their findings show that the projected $95 million in revenue the governor hoped to raise fell short, and the actual revenue increase would be roughly $35 million. This, said Stenhouse, is because the governor failed to account for a decrease in sales due to tax hikes.

“Tax policy is not static,” he said. “Two percent more or two percent less can have a ripple or domino effect on the economy.”

The report also shows that there would be the loss of 1,400 jobs, and investment in the state will drop by $27 million.

“The lesson here is we’ve been doing these incremental tax hikes for decades – [with the logic] a little here, a little there won’t harm you, but it does do harm if you do it over and over again,” said Stenhouse. “That’s why our economy is in such bad shape. If you take from the golden goose … yes there is a consequence.”

Venturini said the increased meal and beverage tax would cause restaurants to lose business, and consumers to pay more. She also said that tips for restaurant employees would be negatively affected.

In addition to the food and beverage tax hikes, Chafee proposed a new 13-percent rental tax, which has caught the attention of the Rhode Island Association for Realtors (RIAR). RIAR believes this new tax will have damaging effects on the real estate and tourism industries in Rhode Island.

“The rental property tax is currently zero,” said Cecile Cohen, past president of RIAR. “I’ve been dealing with vacation rentals for over 26 years, and this would decimate the tourism industry.”

Cohen said it would affect the housing industry in general, as many people depend on rental income to support their mortgages.

“It would increase the foreclosure rate,” she said.

She said the tourism industry would suffer, as many people look to rent in South County over the summer. The new tax, she said, would dissuade that. She also said it would push renters out of state.

“Massachusetts and Connecticut don’t tax rentals,” said Cohen. “I wouldn’t look at Rhode Island if I was renting. Massachusetts and Connecticut have plenty of coastline, too. We need people to stay here.”

“South County, where summers are anchored by a vibrant rental market, may also be passed over in favor of more affordable locations if the expanded lodging base tax also proposed in the governor’s budget is passed,” echoed Venturini.

Venturini said the meal and beverage tax would also add to the depletion of the tourism industry.

“This increased tax will also place Rhode Island at a competitive disadvantage in the fight to attract visitors,” she said. “We would instantly bare a black mark for surpassing the meals and beverage tax rate in neighboring Massachusetts and Connecticut.”

Cohen said the rental tax would affect renters and owners alike.

“Who’s going to monitor the individual owners,” she said. “Renters now are struggling to get vacations. In the last year I had so many people cancel their vacation rentals because they lost their jobs.”

Cohen, like Stenhouse, believes the creation of a rental tax won’t have the desired effect.

“This isn’t going to help anybody. It’s going to hurt the Rhode Island economy,” she said.

Venturini and RIHA are looking to discuss the potential negative effects of Chafee’s proposed tax hikes with the General Assembly. They’re also holding public meetings throughout the state during the month of February. They will be holding a meeting at Gregg’s Restaurant in Warwick on Feb. 21 at 9:30 a.m.

“RIHA urges the governor and the General Assembly to work as partners to solve Rhode Island’s perennial budget deficit through long-term, meaningful job creation and institutional reform, and not the implementation of new taxes that place an undue burden on all of us,” she said. “We hope we can work together to make Rhode Island a more competitive destination.”